Article

The US wrestles with its recovery plans

Joe Biden’s presidency started on a high, with optimism about Washington’s change in direction. However, he has failed to deliver the unity – and spending – that he promised.

| 6 min read

When President Biden flew to Rome for the G20 and Glasgow for COP26 he had hoped to take with him firm US budget proposals that Congress would enact soon. He needed to show that his plan to cut US carbon dioxide emissions by 50%-52% of 2005 levels by 2030 was well based. It will take substantial US Federal spending and assistance to the private sector to deliver.

President Biden needed to show the world that his PREPARE policy could pay for the innovations and fund his promise to help the world adapt to climate change and the green revolution. Instead, after a frustrating day of negotiations with two dissenting Democrat senators, he left for Europe in haste, announcing a $1.75 trillion compromise additional budget which was then denounced by one of the two rebels. West Virginia Senator Joe Manchin’s resistance to big spending has once again left doubts about how much money the Senate will authorise and when.

When the President was called to address COP26 on 1 November, he expressed surprise at the timing of his remarks. He went ahead and announced to the world his PREPARE strategy to assist the world with climate adaptation, assuming his awkward Congress will oblige. The US aims for a major transition of its own, with the state involved in introducing electric school buses, rolling out charger points across the union and offering incentives to free enterprise to innovate and invest in successors to fossil fuels. It is based around a planned $550bn investment to reduce US carbon dioxide emissions by 2030.

Division not unity

The Biden Presidency was widely welcomed when it dawned. The world liked the sound of a new era of internal US unity that Mr Biden promised. Many wanted the US to lead world initiatives and trends again after Donald Trump’s more individualistic approach, driven by the wish to have a series of bilateral deals, not multilateral institutional agreements. They hoped the US would not only re-join the Paris climate accord but would offer plenty of cash and energy to help get the world back on track for a lower future temperature.

Instead, the President has annoyed Republicans by many of his actions and plans, reinforcing divisions over treating Covid-19, the size of the budget, the policing of the borders and abortion rights. He upset NATO allies by his premature unilateral withdrawal from Afghanistan and the results of that decision with the fall of the Afghan government and the return of the Taliban. Now he is stumbling over delivery of his large, planned budget changes – which need doing soon and would not be possible at all were the Democrats to lose control of either House next year. This week the Republicans won the Governorship of Virginia, a state that gave Biden a good majority in the Presidential election.

The Fed too is showing a less certain approach. Jerome Powell wishes to be reappointed but is being made to wait as the President is lobbied by some in his own party who want a left-leaning Democrat to replace him. The Chairman of the Fed has continued to support lax monetary policies to give the new administration every opportunity to preside over a recovery and to have some capacity to spend and borrow more if it wishes.

Fed misjudgement

Unfortunately, the Fed has lost its touch in forecasting, assuming there would be little inflationary pressure and assuming the economy was still below capacity. Instead, inflation has leapt up to 5.4% compared to the Fed’s December forecast of 1.8% for 2021. The central bank now assures us that it will be a temporary surge that will subside next year, avoiding the need for tougher monetary action.

Meanwhile, individual MPC members up their forecasts of inflation and start to predict rate rises next year in place of keeping rates near zero for 2021-23 as forecast last December. The economy shows signs of severe bottlenecks in a number of areas, and some wages are rising sharply as the service sectors scramble to recruit more labour for the re opening of businesses that rely on social contact. Some Fed Board members are under attack for their personal account dealings during the pandemic crisis. The Chairman has promised tighter standards in future.

The decline in support for the President means there is now the possibility of the Republicans winning back control of either the Senate or the House – or both – next year. This makes the current-year budget rows doubly important. President Biden sees this budget as crucial to his presidency. He wants it to set the tone for substantial green investment and for social change with more generous provisions for childcare, nursery education and college attendance.

Our base case assumes the Democrats will find a solution that Senator Manchin and Arizona Senator Kyrsten Sinema can vote for, though they are holding out and demanding further reductions in spending and avoidance of some tax rises that the main body of the Democrats want.

We assume the Fed will start to taper its bond purchases soon, and inflation will come down sometime next year after a nasty surge. The worse cases now have to include inflation setting in more strongly if temporary wage rises embed for longer and on a wider front as people seek compensation for price rises. There is also the danger of continuing strife over budgets and debt limits.

Sometime in the next few weeks Congress needs to approve a lifting of the debt ceiling. It will also need to endorse the President’s planned generosity to the world with his climate change funds and projects.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

The US wrestles with its recovery plans

Read this next

The future of food

See more Insights

More insights

Article
Omicron and hawkish Fed concern markets
By Garry White
03 Dec 2021 | 6 min read
Article
The pandemic shakes markets and Germany goes greener
By Charles Stanley
29 Nov 2021 | 5 min read
Article
This has been a US-led equity bull market
By Charles Stanley
11 Nov 2021 | 4 min read
Article
COP26 will direct substantial green investment
By Charles Stanley
05 Nov 2021 | 5 min read